If you were in the full-time workforce in 1980, you likely remember when the 401(k) plan came on the scene. Up until that time, pensions were the retirement vehicle of choice, but as pensions became more costly, the 401(k) became the plan of choice and by 1990, it was commonplace in private sector employee benefit plans. As of the early 1990s, 401(k)s had an estimated $900 billion in assets.

SEE: The 4-1-1 On 401(k)s
By 2011, that number had ballooned to $4.3 trillion, but something else had ballooned as well: the fees. As of 2010, plan administrators were charging more than $85 billion in management fees and as more baby boomers find themselves closer to retirement, they're noticing that they aren't as prepared for retirement as they thought they would be, and a portion of the problem may be found in the fees.

How important are the fees? According to the Vanguard Group, for every .5% in fees, a person will have 10% less in their 401(k) after 30 years of work. For this reason, workers need to closely monitor the fees they're paying for their 401(k).

SEE: 401(k) Fees You Need To Know

A Mattress
We've all heard how difficult it is to make side-by-side comparisons of mattresses, because different model numbers are manufactured for individual stores. To some degree, that's also the case with 401(k)s. Plans are often put together by the employer and the plan administrator, but until now, not all fees that are passed on to the individual employee have been disclosed.

Under new laws set to go in to effect by the beginning of April (Although it could be pushed back), all fees being passed on to the employee must be disclosed in an easy-to-read format, so employees can compare the efficiency of their choices. The company administering the plan will also have to disclose how they are collecting the fees. That may include billing the plan, deducting the fees from the employee's gains or taking a percentage off the plan's total return.

The Benefits
Experts believe that by disclosing the fee structure, more companies will include more passively managed funds that tend to be much lower in fees than actively managed funds, which employ investors who try to beat the overall market yet show only marginal success over the long term.

According to the Huffington Post, adding a wider range of passively managed index funds could come with a large benefit. One study found that a retirement account could be up to $450,000 larger if a predominance of index funds with low fee structures were used. Under new disclosure laws, those without sophisticated financial knowledge would finally be able to compare the various offerings using the easy to understand information disclosed.

The Bottom Line
Not sure what you're being charged with your current 401(k) holdings? Current laws require that certain fees be disclosed already. Request a prospectus for each of your funds or look for the information online. Consider keeping at least around 20% of your allocation in a passively managed index fund that is probably already offered.

Your employer will soon be required to disclose to you all fees associated with your plan. Once that information is provided to you, take some time to read through it and make changes to your plan based on that knowledge. Better yet, pay a fee-only investment advisor a one-time fee to examine your 401(k) and recommend changes.

SEE: Paying Your Investment Advisor - Fees Or Commissions?

Related Articles
  1. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  2. Retirement

    Retirement Planning for Entrepreneurs and Small Businesses

    If your business has receiveables, here's a smart way to leverage them to build up your retirement fund fast.
  3. Retirement

    Overhaul Social Security to Fix Retirement Shortfall

    There are several theories and ideas about how we can make up for the $6.6 trillion retirement savings shortfall in America. Adjustments to Social Security and our retirement savings plans are ...
  4. Retirement

    The 3 Most Common 401k Rollover Mistakes

    No one is born knowing the tax rules for 401(k)s and IRAs, but only dummies, scaredy cats and suckers don't buckle down to learn them.
  5. Mutual Funds & ETFs

    Top 5 Chinese Mutual Funds

    Learn about some of the most popular and best performing mutual funds that offer investors exposure to the important emerging market economy of China.
  6. Investing News

    How Does US Social Security Measure Up Abroad?

    Social Security is a hotly debated topic. After examining the retirement plans of three different countries, the U.S.'s does not come out the winner.
  7. Investing Basics

    Explaining Unrealized Gain

    An unrealized gain occurs when the current price of a security exceeds the price an investor paid for the security.
  8. Investing Basics

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
  9. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Agency Bond

    Find out about the iShares Agency Bond exchange-traded fund, and explore detailed analysis of the ETF that tracks U.S. government agency securities.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth ...
  3. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  4. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  5. Systematic Manager

    A manager who adjusts a portfolio’s long and short-term positions ...
  6. Unconstrained Investing

    An investment style that does not require a fund or portfolio ...
RELATED FAQS
  1. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>
  2. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>
  3. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  4. Can creditors garnish my IRA?

    Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified ... Read Full Answer >>
  5. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  6. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!